As of May 2010, there is no federal estate tax or generation-skipping transfer (GST) taxe for individuals dying in 2010.  Too good to be true?  Probably.  In 2001, the Economic Growth and Taxpayer Relief Reconcillation Act (EGTRRA) was enacted into law.  This law provided for a gradual increase in the estate tax and GST tax exemption amounts up until 2009, when they disappeared all together for 2010.  However, EGTRRA expires at the end of this year, meaning that if no change is made to the law, we will see the federal estate tax and GST tax exemption amounts return to 2001 levels (i.e., $1 million each).

To create a year-long estate and GST tax "holiday,"  Congress tweaked the Internal Revenue Code.  These tweaks have led to tremendous uncertainty for estates of individuals who die in 2010.  For one, we no longer have an automatic step-up in basis for capital assets deemed owned by an individual at death.  Instead, Congress created a modfied basis adjustment system that limits a step up in basis to $1.3 million for assets passing to individuals other than a spouse and $3 million to a spouse (excluding community property which still qualifies for the full basis step-up).  For another, many married couples' living trusts have formula division clauses at the death of the first spouse that do not work well under the new law.

Most commentators expect that sometime this year Congress will take action to bring back the federal estate tax and GST tax for 2010, and come up with some framework for new estate exemption amounts for 2011 and onward.  Of course, these commentators also reasonably assumed that Congress would have fixed this situation long before 2010. 

The hope is that Congress will fix the temporary repeal (aka mess) soon.  Until this mess is fixed, it is recommended that you have your estate plan reviewed to assess if simple fixes should be made to carry your plan through 2010 successfully.